Shares in bull market territory

Australian shares are trading in bull market territory for the first time in almost four years after the S&P/ASX 200 Index surged more than 20 per cent since June 2012 as fears of fresh macro-economic shocks from Europe, the United States and China are cast aside.

The switch in sentiment has provided some relief for the high Australian dollar, which has been regarded as a safe-haven investment since the global financial crisis.

Yesterday, the dollar traded at $US1.0422, its lowest since January 1, amid concerns that as the rest of the world recovers, the appeal of safe havens diminishes.

With three sessions of trading remaining this month, shares are poised to post their second-best January since 2001 on the back of a 4.01 per cent rise in the benchmark index so far. But they are unlikely to beat a 5.08 per cent rise by stocks in January last year.

Signs of a more stable outlook for Europe is expected to lift shares again on Tuesday after it emerged on Friday that European banks will start paying back some of the European Central Bank’s ultra-cheap long-term refinancing operation (LTRO) sooner than expected.

The rise in borrowing costs for banks in Spain, Italy and Portugal that last year prompted concerns the euro-zone would plunge into crisis has been reversed, with bond yields in those key euro-zone economies now falling for six months.

Investors believe shares can continue their remarkable run. Colonial First State Global Asset Management senior portfolio manager Naz Ressas said: “We are in the making of a bull market, other markets don’t have the attractive valuations. The bond market is overvalued and most other asset classes are offering low returns.

“Equities haven’t kept pace with other assets over the past few years because of their volatility. But margins are starting to improve and companies are starting to spend and invest again in their businesses.’’

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Heading into overseas trading on Monday night, futures markets were pointing to a 7-point gain for the Dow Jones Industrial Average and flat trading for the S&P 500. The S&P/ASX 200 is poised to fall 3 points.

Winning streak

If the benchmark closes in the black on Tuesday, it will be the ninth straight session that shares have posted gains, making it the longest winning streak for local stocks since December 2004.

Fund managers are counting on cash sitting in low-yielding investments to find its way back to the sharemarket, where returns are superior, albeit more risky.

Wilson Asset Management portfolio manager Chris Stott said there was a “renewed sense of confidence as the year kicks off" after key risks to global growth were resolved before the end of 2012. “There’s no fiscal cliff, there is a lot of money to come back into shares," he said, adding that having interest rates at 50-year lows would also boost housing. “Shares are forward looking and I think the index can get to 5500 [points]. Shares typically rise as central banks cut rates and I don’t see the RBA raising until later this year."

Traders are pricing in a 33 per cent chance of a 25 basis point cut in the cash rate to 3 per cent at the Reserve Bank of Australia’s February 5 meeting.

Earnings season test

The first big test for the bull market will be next month’s corporate earnings season. Darren Thompson, lead portfolio manager at MLC-owned Northward Capital warned the market had run ahead of where earnings implied share prices should be and the reporting season next month would be a real test.

“The market has run ahead of where the earnings are likely to come out in the near term, so I certainly think it’s been more of that money flowing in from other asset classes into equities, for a fear of missing out, I think, has driven the January rally to date. The market can hold these levels but I think for it to push on further you need to see earnings growth come through."

Even if earnings can match or better the consensus, the market is 29 per cent below its record high of 6828.7 set in November 2007.

US stocks are closer to touching Wall Street’s October 2007 record of 1565.15 thanks to the S&P 500’s rise of 14.5 per cent in the past 12 months. On Friday, the S&P 500 capped its longest winning streak since 2004, rising for eight sessions. The US will be in focus this week with the Federal Reserve’s first policy meeting for 2013. The minutes from the previous meeting revealed a split over how long to continue quantitative easing.

Interest rates will stay at ultra low levels and the Fed will keep buying bonds until unemployment falls to 6.5 per cent. Also out this week is the non-farm payrolls report. Economists expect this will show that about 160,000 jobs were created in January, not enough to affect overall unemployment.